Municipal Bonds and Their Tax-Exempt Status

Posted on November 27, 2012 by Kathryn

What do you need to know about the tax-exempt status of your municipal bonds? Quite a lot. By no means I am an expert on municipal finance or tax code. Many clients of Pawleys enjoy the safety and income of their South Carolina tax-free municipal bonds. Statistics show us that across the country, municipalities have a sound track record. It is a complex market, however, and every bond should be evaluated individually. Here are a few tidbits for you to consider as an investor seeking tax-free income.

There is a special department within the Internal Revenue Service called the Office of Tax Exempt Bonds. This office acts as a resource to the world of municipal finance. When state and local governments finance airports, hospitals, recreational and cultural facilities, schools, water and sewer infrastructure, roads, and facilities and equipment for police, fire and rescue services, the bond issues normally meet the standards for the interest paid to the bondholders to be exempt from federal, state and local taxation.

The IRS code requires that the funds raised for such issues must meet certain requirements to ensure that the interest is not taxable. The municipalities even have to follow certain rules after issuance to retain the tax-exempt status. If any level of private activity is financed by a municipal debt issue, the bonds may lose tax-exempt status. For example, if a private company moves into a facility previously used by local government, any outstanding bond issues that financed the building are at risk of losing tax-exempt status. Normally in this type of situation the municipality will “defease” or call the bond in early and pay remaining principal and interest to the bond holders. Bonds issued that may support private activity such as hospitals, ports (air or water!), or industrial facilities may be at risk of not having or losing tax exempt status. Municipalities are also disallowed tax exempt status from certain “arbitrage” situations where debt is issued and the money raised is then reinvested in higher interest securities.

When you invest for tax-free income, you might consider starting with highly rated “general obligation” bonds that are backed by the full faith of the issuer. These may include general state, county or city issues, or even local school bonds. “Revenue” bonds generally pay a higher rate of interest, but as you read above, may be very complex to understand even for the most seasoned investor or advisor. Be sure to check the bond indenture to know exactly how proceeds from the bond are being used, and double-check the underlying financial condition of the issuer or project, especially on revenue-backed bonds.

Municipal bonds have a strong track record and historically low default rate, but be careful as you venture into this intricate market.

How Safe are South Carolina Municipal Bonds?

Posted on November 20, 2012 by Kathryn

great facts about tax-free bonds!

Pawleys Investment Library

Back in December of 2010, analyst Meredith Whitney was interviewed on “60 Minutes” where she predicted “hundreds of billions of dollars” in municipal bond defaults. Many investors responded emotionally and fled municipal bonds. Since that flurry of activity, municipal bonds have been one of the best performing asset classes. As of yesterday, the total returns for the Barclays Municipal Index is 6.71% for the past 3 years, 9.65% for the past year, and 6.26% year-to-date for 2012. Today, Standard & Poor’s Rating Services upgraded the Charleston County School District general obligation bonds from “AA” to “AA+.”

Here is some more news from last year in case you missed it:

For News Release May 26, 2011 from New York: “Moody’s upgrades Charleston County Parks & Recreation District to AAA reflecting the district’s strong cash position and conservative budgeting”

July 21, 2011 Wall Street Journal: “Standard & Poor’s Ratings Services on Thursday upgraded its rating…

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Pawleys Investment Advisors post-election commentary on WMBF News NBC Affiliate

Posted on November 7, 2012 by Kathryn

Does the outcome of the 2012 election affect Coca Cola’s sales of Diet Coke? Does it alter the ability of the County of Charleston, South Carolina to pay its interest and principal obligations on its general obligation school bonds? Pawleys Investment Advisors helps investors build portfolios of high quality investments that will perform well in a myriad of economic and market conditions. This holds true the morning after the 2012 elections, whether you are a Democrat, Republican, or Independent. Coca Cola has increased its dividend to shareholders for each of the past 50 years, regardless of whether a Democrat or a Republican held the oval office, nor whether the Senate and/or House of Representatives was predominantly Democratic or Republican. Stay tuned for more as we reveal how pending tax changes affect portfolio construction considerations. A big “thank you” to Alex Holley of NBC news affiliate WMBF of Myrtle Beach for being a wonderful hostess this morning.